S&P: State Pension DB Funding Dips Slightly to
81.8% in Fiscal 2005

March 1, 2007 (PLANSPONSOR.com) - The funding levels
for state pensions slipped slightly in fiscal 2005 to 81.8%
despite solid investment returns, but are expected to
stabilize and improve over the medium term if investment
returns and liability growth meet expectations, according to
a recent report by Standard & Poors.

The S&P report “Improved U.S. State Pension
Funding Levels Could Be On The Horizon” – which measures
the funding levels of state public employee
retirement systems and teachers’ retirement systems –
attributed the dip in funding from 83.5% in June 2004 to
81.8% for fiscal 2005 to the five-yearsmoothing of asset values used by most public
funds, to investment losses in 2001 and 2002.

Funding ratios have fallen dramatically from 2000,
when average levels exceeded 100%; however, the report
said that in addition to optimistic investment returns
for the year, funding pressure might be eased in the
future because of escalations in employer
contribution rates for the years 2003 and 2004.

Compared with fiscal 2000, when an average state
pension fund had little or no unfunded liabilities, with
the exception of certain historically weak plans, the
gross underfunded actuarial accrued liabilities (UAAL)
had increased to about $330 billion as of fiscal 2005
from $284 billion in 2004, the report said. The mean UAAL
per capita on a state-by-state basis amounted to $1,378
in 2005, compared with $1,183 in 2004, while state debt
climbed to $313.5 billion in 2005 from $288 billion in
2004.

Other post employment benefits (OPEB), or those
largely attributable to retiree health care, also affect
the total long term liabilities of state and local
governments, especially in light of new accounting rules
issued by the Government Accounting Standards Board (See
GASB Unveils Proposal on Disclosure Requirements for
Plans). S&P said in the report that GASB 45 does not
change the nature of these pre-existing retiree health
care liabilities, but will cause states, as employers, to
focus on this issue and develop plans for managing these
obligations under the new reporting environment, the
report said.

The S&P report predicted nothing out of the
ordinary set to affect pension assets and liabilities for
fiscal 2007, including the uncertainty of future returns,
contributions that are less than the full annual required
amount, potential increasing liabilities and demographic
changes.